May decline in gold and silver stocks will create opportunity

Last week we noted that the gold and silver shares had formed a short-term rebound in response to an oversold condition. Yet we felt that the downtrend that originated from the hard reversal in March was still in effect. As we go to publish, the rebound appears to be petering out. Be aware that there is more potential downside in May. The good news is a decline in May will likely create a great buying opportunity at the end of the month and in June.

Let me start with the silver complex as its providing the most clarity. We wrote about the coming opportunity in Silver at the end of March. We posited that a break to new lows would likely mark the end of the bear market and signal an excellent buying opportunity. We derived that view from a few charts including the bear market analogs chart which is posted below. The chart (which excludes the 1980-1982 bear) makes a strong case that Silver should bottom sometime in the next four to eight weeks.

Though Silver has broken below its December 2013 low and is inches from a new bear market low, the silver stocks remain (at the moment) comfortably above their bear market lows. The chart below plots both SIL (seniors), SIL against Silver, SILJ (juniors) and SILJ against Silver. SIL would have to decline 14% to test its December low while SILJ would have to decline 19% to test its December low. The relative strength of the silver stocks amid a breakdown in Silver is a signal that a major trend change is developing.